Anchorage Digital Weathers Crypto Storm
Crypto lending and yield platforms have garnered a lot of attention lately due to the troubles at firms like Three Arrow Capital (3AC), Voyager Digital, and Celsius Network. The first two have filed for bankruptcy/liquidation. Celsius remains a bit of a mystery but the prognosis does not look good.
Recently, Anchorage Digital published a blog post addressing the “path forward for crypto lending.” While alluding to troubles on other platforms, Anchorage gave the all-good signal for their platform:
“While bailouts and account freezes are happening elsewhere, Anchorage Digital has experienced zero negative impacts, and we’re actively expanding our proven, capital preservation-focused lending program.”
Anchorage said they have always taken the regulated and safer approach to offer their services. This is a key characteristic of the platform which is the first, and only, Office of the Comptroller of the Currency (OCC- the top federal bank regulator) approved digital bank.
Founded in 2017, in January of 2021 the OCC approved Anchorage Trust Company, a South Dakota chartered trust company, to become Anchorage Digital Bank, National Association. At that time Anchorage said, “crypto deserves a bank, and we are immensely proud of being approved as the one to set the standard.” Later in the year, CI reported as to how receiving a charter eases the regulatory burden of multiple compliance regimes.
“It puts us shoulder to shoulder with [the] big banks that we want to service.”
Clearly, a compliance-first approach is the better path. Anchorage has operated a lending program for the last year and a half with no reports of any issues even during extreme market volatility and declining value in crypto markets.
Anchorage reports “zero losses” for clients or the firm and no liquidity issues regarding withdrawals. If only all crypto lenders could say the same. Preservation of capital has been fundamental for Anchorage. The company explains:
“… we weren’t first to the lending market and we weren’t offering the largest lines of credit, so many borrower counterparties turned to the larger, earlier platforms. We regularly heard our yields weren’t high enough, and we extended far less credit than more aggressive lenders.”
Higher yields are great until they aren’t and you can’t get your principal back.
Recently CI connected with Nathan McCauley, CEO and co-founder of Anchorage Digital – who also co-authored the previously mentioned blog post. We asked McCauley why the extreme volatility has not impacted Anchorage. He said their risk mitigation and rigorous vetting have insulated them from problems others have been experiencing:
“When markets are good, this conservative approach may not be as exciting; but we’re not here for hype, and neither are the institutions we serve,” McCauley stated. “They look to us to provide stability in the long run–and in bear markets, that approach really shines through.”
And how does the federal bank charter help? McCauley explained that while it does not directly impact their lending program as they are separate entities, they benefit from being regulated in a number of ways;
“Because Anchorage was the first federally-chartered digital asset bank in the U.S., we’ve built a precedent-setting risk and compliance team–a team that has been well-utilized in determining creditworthiness. We believe that the kind of pioneering precedent that Anchorage is adhering to could be a valuable roadmap as these types of regulatory standards evolve. Anchorage has always taken a regulated, safe approach to our stack of services, and our approach to create risk-model based lending is no exception.”
Asked about 3AC and Celsius and their lending and yield models, McCauley declined to comment on how others make their decisions or their understanding of risk while noting that Anchorage’s measured approach has led to zero losses of client or Anchorage’s capital. There have been no obstructions to deposits:
“That track record speaks for itself, and it’s a model that others can replicate. I outlined it in a blog here, so these aren’t trade secrets,” said McCauley. “We are following the same approach taken for years by the traditional financial institutions we serve.”
Counterparty risk has long been an issue in traditional markets – one that still has a ways to go to be fully resolved. This is a situation where regulation technology (Regtech) may play a role at some point in the future. While still early days, crypto markets have just shined a bright light on the current shortcomings of the industry.
McCauley believes that responsible lending is fuel to America’s economic engine and this should be no different for crypto:
“Financing is at the heart of sustainable growth. Going forward, the industry can expect regulators to play a growing role in determining how we define “responsible.” Striking the right balance of consumer protection without hindering innovation will be mission-critical for crypto companies as the industry continues to mature.”
And what about self-regulation? Can digital asset platforms, as an industry, work to mitigate risk in aggregate?
“At Anchorage, we believe pro-active partnership with lawmakers and regulators will usher in a more accessible financial system that gives consumers better protections and simplifies the worldwide flow of capital,” stated McCauley. “Crypto companies need to proactively partner with regulators and lawmakers to transform the digital asset ecosystem’s ‘new tools’ into existing rules.
We asked McCauley about his blog post which states “who cares about the highest yield if you lose your funds.” Shouldn’t this be obvious to everyone or is it simply naive participants chasing yield regardless of risk?
McCauley shared that in crypto, it’s important to ask yourself “does this sound too good to be true?” If the answer is “yes”, it’s probably a red flag.
“Our institutional clients have recognized this for decades, so they are already more insulated from these kinds of risky investments. Meanwhile, we don’t take that for granted at Anchorage; we’ve just launched a new crypto-exchange network with Binance US, with a number of others coming on board, that segregates corporate funds from client funds into separate vaults. This is another practice standard in traditional finance that safeguards the institutions we serve from bankruptcy risks of any individual company.”
So what does the top digital asset bank expect in the coming months. Will the shakeout continue?
“I grew up in rural Indiana, so I’m familiar with the Farmers’ Almanac–but I try not to offer predictions on when the latest crypto winter will end. But I can predict that, like any other season and prior market cycles, this crypto winter will also come to an end. Anchorage and our clients will emerge from it knowing that our structural integrity, and our approach to financing in particular, is stronger than ever.”